IEA's 2015 underestimation of demand growth
Posted: Sun Oct 06, 2019 8:06 pm
From a poster (aceroilandgas) on IV Energy Investing mb:
Amid the malaise of this seemingly endless oil bear market, oil demand over the last 4 years has been nothing short of phenomenal. In the 4 years preceding the oil crash, from 2010 to 2014, oil demand grew by 4.4M barrels from 88.7M to 93.1M. Meanwhile, in the 4 years following the oil crash, from 2014 to 2018, oil demand grew by 6.7M barrels, from 93.1M to 99.8M. This equates to 52% acceleration in oil demand growth from 1.1M per year pre-crash to 1.67M barrel per year post-crash. (data taken from BP Statistical Review of World Energy - Page 20 - https://www.bp.com/content/dam/bp/busin ... report.pdf). This basic and simple relationship between demand growth and prices was completely lost on the IEA in 2015, from the IEA 2015 Medium Term oil report:
For the next six years, global demand growth is projected to average 1.2% per annum, below its pre-Great Recession trend (1.9%, 2001-07), taking global oil product demand up to around 99.1 mb/d by 2020. This represents aggregate demand growth of 6.6 mb/d for the six-year period….On balance, expectations of world oil product demand growth are more subdued than prior to the recent oil price drop. A combination of cyclical and structural factors stand behind this softer demand outlook, including, but not limited to, significantly reduced expectations of global economic growth for the early part of the forecast period. Towards the latter part of the forecast, a structurally-driven reduction in the oil intensity of the global economy, supported in part by fuel switching out of oil and increased energy efficiency, somewhat blunts the demand impact of forecast economic growth.
https://www.iea.org/publications/freepu ... _Final.pdf
Looking at what happened since the IEA 2015 forecast, oil consumption reached 2020 demand levels, 2 years ahead of schedule. Based on the IEA 2015 demand models, 2018 oil demand should have been 96.9M, instead oil demand reached 99.85M in 2018, or around 2M barrels above what was expected at the outset of the oil crash. What this data indicate is that we have no demand problem. Looking forward, the IEA is looking for 7.1M barrels growth in oil demand over the next 5 years or 7.1M increase between 2019 and 2024, this would equate to 1.4M per year average growth in oil demand. 31% of that expected demand growth (2.2M barrels or 300K per year) is in the bag since it is tied to more than 50 petrochemical projects in construction (https://webstore.iea.org/download/summa ... 019-ES.pdf). It is possible that a cyclical economic slowdown will slow demand growth in a given year, but based on population trends and structural economic growth in the developing world oil demand is set to increase by millions of barrels over the coming years. Hence, oil investors need not lose sight of the fact that demand growth is here and it is here to stay for many years to come. All that we need for oil prices to rally is a moderation in the US shale growth onslaught from 1/2M barrels a year to something in the 500K to 700K range max, once we get there, oil prices will likely regain the $60-$70 price range, a price at which demand remains healthy and many oil companies become extremely profitable.
Amid the malaise of this seemingly endless oil bear market, oil demand over the last 4 years has been nothing short of phenomenal. In the 4 years preceding the oil crash, from 2010 to 2014, oil demand grew by 4.4M barrels from 88.7M to 93.1M. Meanwhile, in the 4 years following the oil crash, from 2014 to 2018, oil demand grew by 6.7M barrels, from 93.1M to 99.8M. This equates to 52% acceleration in oil demand growth from 1.1M per year pre-crash to 1.67M barrel per year post-crash. (data taken from BP Statistical Review of World Energy - Page 20 - https://www.bp.com/content/dam/bp/busin ... report.pdf). This basic and simple relationship between demand growth and prices was completely lost on the IEA in 2015, from the IEA 2015 Medium Term oil report:
For the next six years, global demand growth is projected to average 1.2% per annum, below its pre-Great Recession trend (1.9%, 2001-07), taking global oil product demand up to around 99.1 mb/d by 2020. This represents aggregate demand growth of 6.6 mb/d for the six-year period….On balance, expectations of world oil product demand growth are more subdued than prior to the recent oil price drop. A combination of cyclical and structural factors stand behind this softer demand outlook, including, but not limited to, significantly reduced expectations of global economic growth for the early part of the forecast period. Towards the latter part of the forecast, a structurally-driven reduction in the oil intensity of the global economy, supported in part by fuel switching out of oil and increased energy efficiency, somewhat blunts the demand impact of forecast economic growth.
https://www.iea.org/publications/freepu ... _Final.pdf
Looking at what happened since the IEA 2015 forecast, oil consumption reached 2020 demand levels, 2 years ahead of schedule. Based on the IEA 2015 demand models, 2018 oil demand should have been 96.9M, instead oil demand reached 99.85M in 2018, or around 2M barrels above what was expected at the outset of the oil crash. What this data indicate is that we have no demand problem. Looking forward, the IEA is looking for 7.1M barrels growth in oil demand over the next 5 years or 7.1M increase between 2019 and 2024, this would equate to 1.4M per year average growth in oil demand. 31% of that expected demand growth (2.2M barrels or 300K per year) is in the bag since it is tied to more than 50 petrochemical projects in construction (https://webstore.iea.org/download/summa ... 019-ES.pdf). It is possible that a cyclical economic slowdown will slow demand growth in a given year, but based on population trends and structural economic growth in the developing world oil demand is set to increase by millions of barrels over the coming years. Hence, oil investors need not lose sight of the fact that demand growth is here and it is here to stay for many years to come. All that we need for oil prices to rally is a moderation in the US shale growth onslaught from 1/2M barrels a year to something in the 500K to 700K range max, once we get there, oil prices will likely regain the $60-$70 price range, a price at which demand remains healthy and many oil companies become extremely profitable.